Millennials! Want To Retire Early? This Is How You Do It

October 26, 2016

Millennials! Want To Retire Early? This Is How You Do It

  • Millennials are very interested in investing and come along right in time for baby boomers who need to dump their assets in preparation for a comfy retirement.
  • We’ll discuss a few things Millennials need to know before investing that aren’t often publicized due to conflicts of interest.
  • Beware of fees. Following this piece of advice can save you a cool million in your lifetime, and we’ll show you how just below.

Introduction

On Monday we discussed the Next 50, a new index that includes stocks in companies whose primary customers are Millennials (the generation born between 1980 and 2000).

The Next 50 is an index totally focused on growth, but with some questionable fundamentals and uncertain futures for the companies listed. Nevertheless, investing has become a hot topic amongst Millennials. This is of essential importance to the Baby Boomer generation (those born between 1946 and 1964) as they begin to retire and the need for new investors to pick up their stocks arises.

Today we’ll discuss how Millennials approach investing, point out the importance of this approach for Baby Boomers, and give some indications as to what to be careful about as the majority of Millennials have little investing experience.

Millennials & Baby Boomers: What’s The Connection?

A recent JPMorgan Chase study showed that Millennials aspire to retire earlier than the generations before them. What’s excellent about this is that Millennials start investing at a very early age, 23.

figure-1-millennials-and-retireing
Figure 1: Millennials and investing. Source: JPMorgan Chase.

Starting with investing earlier in life is excellent news for current and soon-to-be retirees as they will be able to sell assets in order to fund their financial needs in retirement. Generation X (those born between 1965 and 1980) now, and Millennials later, will see fast net wealth growth in the next two decades which will feed demand for assets and keep prices at high levels, hopefully. This thesis is confirmed by Congressional Budget Office research where the decline in demand for assets is expected to be slow and covered by increases in wages for new generations.

Unfortunately, as good as it sounds that Millennials start investing at 23, only 45% of them know how much they will need in order to retire. An even worse number is that 80% of Americans consider themselves unexperienced when it comes to investing, and this percentage doesn’t change much between generations.

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Figure 2: Investing experiences. Source: JPMorgan Chase.

But to retire safely, you need to invest smartly. In the next section, we’ll discuss some general truths that will enable you achieve that goal sooner.

What To Be Careful Of When Investing

No diversification among asset classes.

A bull market usually attracts people with no experience and who have never invested in stocks before, simply because they seem to always be going up. This is exactly what’s happening now as a lot of Millennials have begun investing in just the last 7 years.

A big mistake is to think that stocks will always go up in value and thus that you should have all of your money in stocks. Different streams of investing income will lower your risks and give you the opportunity to rebalance between asset classes when one is in a bubble and the others are cheap.

Be careful not to get caught with all of your assets in stocks in a bear market. Cash is always a good alternative as it will allow you to invest more when stocks prices fall

Not worrying about fees.

A recent Deloitte Investment Management study refers to the above mentioned generations as “fee pools.” Always ask yourself if your advisor is more focused on his fee or on your benefit, and be very careful not to pay too much in fees which can easily take more than 50% of your retirement portfolio.

“Wall street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

The figure below shows how much fees eat into your portfolio over a 40-year period.

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Figure 3: $100,000 investment after forty years at 9%. Source: Author’s calculations.

A mere fee of 1% can erase 30% from your portfolio in a 40-year investment period. As 30% is an extremely high amount, there are two things you can do.

One is to invest in low cost index funds and the other is to invest for yourself. The second option requires more work but can lead you to better returns and the knowledge that your future depends on you. In any case, beware of fees, especially when they come from shiny, expensive offices, as it is you who pays for that.

Always keep taxes in mind.

Maximize your retirement accounts in order to pay the least amount in taxes while you are saving. Taxes are the same as fees, they cost you a lot but can be avoided and deferred to some extent. It’s wise to learn as much as possible on the topic and even sit down with a tax advisor in order to limit novice mistakes.

Conclusion

Investing is a tricky subject an no one knows what lies ahead of us. Maybe there will be a stock market bubble or some kind of lost decade.

In any case, making smart moves—like keeping fees low or avoiding non-necessary tax payments—can increase your final returns.

Keep reading Investiv Daily to learn more about how to invest, to better understand the markets, and how to save on fees as doing so can save you more than a million in your lifetime.